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Pivot patterns on Japanese candlesticks

Pivot patterns on Japanese candlesticks

Among the variety of methods for analyzing the market position, the forex candlestick analysis stands out. It has significant capabilities for obtaining operational information about the state of the market and possible changes. The prediction made by using a combination of Japanese candlesticks is very accurate and reliable. It gives the trader information about the movements of trading positions, about the direction of the trend line.

 

Graphical analysis of Japanese candlesticks is divided into two large groups: depending on the location of candlesticks, combinations can refer to trend continuation patterns and candle reversal patterns. Now we will talk about the latter.

The Hammer and Hanging Pattern in Japanese Candlestick Analysis

The candlesticks shown in the two figures below are characterized by a long lower shadow combined with a small body. And the body enters at the top of the trading day's price range. These patterns of Japanese candlesticks are used equally often in a bull and bear market, the only difference is the trend phase. If the market is in a declining trend and forex candlestick analysis forms a pattern that coincides with the first pattern, the trend will soon change. A candlestick of this type is called a "hammer".

 

 

The formation of a candle from the second pattern when the price rises also indicates the imminent change in the trend, but in this case the end of the upward trend. This candle is called by financial analysts "the hung man" because of its resemblance to a hanging human figure.

 

The model of the hung in the candlestick analysis

 

The main features of the "hammer" and "hung" is the location of the body of the candle in the upper area of the price range, the size of the lower shadow, twice the size of the body, and the absence or small length of the upper shadow.

 

The described combinations of Japanese candlesticks not only predict the change of the trend, but also describe its potential: the smaller the size of the body and its upper shadow, the higher it is. The "hammer" and "hanged" bodies can be of both colors. If the hammer is white, then its "bullish" essence is more pronounced, the black body of the hanged, on the contrary, indicates the strengthening of bearish positions.

 

The appearance of the white hammer indicates a sharp drop in value over the past trading day, which gave way to its approach to the maximum price of the session. Obviously, the situation has improved for the bulls.

 

The black "hung" becomes a signal that the closing price never reached the opening price. The "bears" can only benefit from such a situation. If the forex candlestick analysis has demonstrated a hung man, the trader should not take any actions until there is a clear bearish signal. The market condition can be described approximately as follows: the trading positions are now subject to the bullish laws, but the figure on the chart is clearly a hanged man. It means that this trading session will be opened at the maximum price, then the price will decrease, then it will increase again and the trading day will be closed at or near the maximum. To say for sure that the "hung" indicates a trend reversal, it will not be possible. However, the price fall in one trading day is also not accidental, it means that the market is influenced by the factors, which will lead to the change of the trend.

 

The main rule of the trader, who deals with the graphical analysis, can be formulated as follows: at the formation of the "hanging" it is necessary to evaluate the price gap between the candlestick body and the opening price of the next day's session. The more significant is the gap, the more likely it is that the "hung" will become a price top. Other evidence of a bearish market trend is the black color of the candle, the closing price of which does not reach the same price in the session when the "hung" was found. You need to control minimal deposit fbs to avoid loss of money. 

The model of the hung in the forex candlestick analysis

 

The description of the behavior of the hung man is exactly the same as the hammer, only in reverse. The significant price gap upwards, which was formed between the body of the hammer and the opening price of the next session, is a sign that the hammer is likely to become the bottom. The formation of a candle with the white body, if its closing price exceeds the closing price of the session when the hammer was announced, indicates the same probability.

 

Absorption in forex candlestick analysis

"Hammer" and "hung", discussed above, are separate candles on the chart. But much more often the analysis of Japanese candlesticks operates in groups of them. One of the important and popular combinations is called the absorption model. It is shown on the chart as two black and white candles.

 

Combination of Japanese candlesticks: Engulfment

 

In the chart above, the white body of the candle is "absorbed" by the black body, signaling a change in trend. The initiative passes into the hands of the bears.



If the combination of Japanese candlesticks takes the form of a takeover as in the figure above, it means that in the near future there will be a reversal in favor of the bulls.

 

An adequate takeover pattern is based on three factors:

 

  • The market has a clear upward or downward trend, even in the short term.

  • The presence of two candles, different in color. The first body is absorbed by the second, the shadows are not taken into account.

  • The bodies of candlesticks are necessarily of different colors. If the market has been showing a declining trend for a long time, the absorption of a black candle by a big white candle may indicate a reversal soon. An uptrend, during which a large black candle absorbed a small white one, will end after a while.

Experts who actively use candlestick analysis forex, identified a number of signs, the emergence of which make the reversal of the absorption more likely:

  • Significant excess of the size of the second candle. The previous trend in this case gives up positions.

  • Appearance of the takeover pattern after a long or, on the contrary, a sudden trend. When the trend is prolonged, the buyers are already making long deals. Therefore, opening of new positions, which would provoke the growth of the market, is unlikely. Too hasty increase in the value of positions leads to the fact that traders are trying to realize profits by closing deals.

The absorption of the second body of several candles.

Market example of the takeover combination

 

In the figure above, the early summer and late winter absorption pattern on market tops pointed traders to a prolonged bearish trend.

 

Market example of a bullish takeover combination

 

The figure above is a June bull takeover that signaled a bearish trend reversal.

 

Dark cloud veil in Japanese candlestick analysis

Another pattern used to determine the reversal of market trends has the romantic name of "veils of dark clouds". It consists of two candles, which are formed after an increasing trend and also at the upper boundary of the price corridor. Such combinations of Japanese candlesticks work in predicting a break on the top.

 

A large white candle is observed in the first session. On the second candlestick, the opening value is higher than the maximum recorded on the previous day. But by the end of the trading session the closing value becomes approximately equal to the minimum of the trading day, the previous candle becomes overlapped by it. The probability of formation of a top increases when the closing price of the next candle decreases, i.e., the more the white body is closed, the more probable is the break.

 

Experts from Japan, whose professional interests include forex candlestick analysis, believe that the closing price of the black body should overlap at least half of the white. If this threshold is not reached, then one should not risk positions until a more convincing bearish signal is received.

 

Dark clouds veil combination

 

There are also signs for this model that increase its credibility:

 

  • The magnitude of the white body's overlap area with the black body, or the proximity of the black body's closing price to the opening price of the previous white candle. Complete overlap of the black candle is known as a bearish takeover. "Dark cloud veil" is characterized by only partial closure, so the comparison to an incomplete eclipse of the sun is sometimes used (both in the case of an astronomical phenomenon, and in the market, the white body is not completely hidden). By analogy, a bearish-type absorption can be correlated with a total eclipse of the luminary. Accordingly, these combinations of Japanese candlesticks more clearly indicate a future change in trends. When a large white candlestick is formed, whose closing price is greater than the maximum values, which were formed by a curtain or absorption, then traders expect an increase in prices.

  • A large white candle with the opening price coinciding with the minimum of the day (there is no lower shadow) is formed against the background of a prolonged rising trend. During the next trading session, a large black candle appears, which opens at the maximum price and closes at the minimum. This situation is known under the term "black day with a cut off peak and cut off base".

  • The opening of the second black candle, belonging to the dark clouds, above the resistance level and the subsequent decline in prices below the level, indicates the loss of control of the bulls over the market.

 

The cloud gap model in forex candlestick analysis

The previous model considered, the "dark clouds veil," indicated a change in trend at the market top. The next element forming the forex candlestick analysis, the "gap in the clouds," indicates a trend reversal at the base. It is formed by two candles, its appearance is characteristic of the market with a declining trend.

 

The first candle has a dark body and the second candle is represented by a large white body. The opening price of the light candle is lower than the minimum price of the previous black body. Then there is an increase in value, which leads to the formation of a large white candle. It closes above the middle of the black body.

 

Cloud Gap Model

 

The bullish Japanese "cloud gap" candlestick model has a lot in common with the bullish engulfment pattern. In it, a white candle absorbs the black body that went before it. "Gap in the clouds" of the bullish kind is characterized by partial coverage of the black candle by the white candle. The longer the length was covered, the more likely the change of trend at the base.

 

The logic of the Japanese candlestick model "a gap in the clouds" is as follows: the market is in a recession. The next black candle confirms the trend. But in the next trading session there is a gap downwards between the opening price and the previous price minimum. But the price gradually increases, and the next trading day ends with the significant price increase.

 

The models of Japanese candlesticks "gap in the clouds" and "dark clouds veil" have the same signs of reliability. In this model, the previous candle must necessarily be covered by more than half. This condition is more important for this model of Japanese candlesticks than in the "veil".

 

The gap in the clouds model on the real chart

 

The "gap in the clouds" shown on the chart is a perfect example of the model. The white candle is open at a price that does not reach the previous candle's low, and the black candle's coverage is greater than 50%.

 

The Star Model in Forex Candlestick Analysis

For traders who actively use forex candlestick analysis, the most unpredictable and intricate system that foreshadows a trend reversal are the "stars". This is the name of the small candles that form a price gap with a large preceding candle.

 

The formation of the "star" occurs only in the presence of a gap, and the shadows of the candles may intersect with each other. Forex candlestick analysis says that the color of the "star" can be any. The place of occurrence, however, also. If a candlestick has one horizontal line instead of the body, it is considered a "doji star". The formation of stars, especially of the "doge" type, indicates the likelihood of the end of the prevailing trend.

 

The weakening of the irreconcilable struggle between the bears and the bulls becomes the reason for the small size of the star. When the market is rising significantly and the bulls are in the best position, the star signals an equilibrium between the buyers and the sellers. Such a delicate balance may be due to the activity of the latter as well as to the weakening of the former. Either way, the rising trend has ceased to have good potential and may soon change.

 

Forex candlestick analysis considers the second type of stars, which are formed in a declining trend. If the star appears after a large dark candle, the market may reverse. If the bears are dominant, the star indicates a gradual equalization with the bullish players.

 

Star pattern in candlestick analysis

 

There are four types of Japanese star candlestick patterns: evening, morning, doji and falling. The color of the star's body does not matter.

 

Morning star in Japanese candlestick analysis

 

A trend reversal at the base can be predicted by a "morning star" consisting of a large black candle, followed by a break down with a small candle. The third trading session shows a candlestick with a white body, almost completely overlapping the black candlestick of the first session. A simple analysis of Japanese candlesticks shows that the bulls have the advantage.

 

An example of the morning star

 

The pattern shown above is a "morning star" pattern. Its emergence can be judged by the large white candle, which followed the "star".

Evening Star in candlestick analysis

 

This model mirrors the "morning star", but has a bearish character. According to it, the reversal occurs on the top. Therefore, the forex candlestick analysis says to act if the "evening star" appeared on the chart of the growing trend.

 

The composition of the described model is determined by three candles. The first and second are large white candles, followed by the star. This is the first "message" to the market reaching its top. The last, third candle proves the formation of the maximum and closes the "evening star". According to the materials that make up the forex candlestick analysis, the last candle is black and almost completely overlaps the first white candle.

 

An example of the Evening Star

 

The Evening Star pattern above. The long uptrend has shown the first signs of reversal with the appearance of the "star."

 

The reversal patterns of the morning and evening star dozhi are very similar to those described above, the difference between them is in the formation of a candle, and not a small candle, and the body of which is absent at all due to the equality of the closing and opening prices. Other features of the models are identical. More reliable model, which offers a forex candle analysis, are exactly the "morning" or "evening" doji star, because it contains a doji candle.

 

Although the theory assumes that the presence of the star in the model, the gap is required not only between the first and second bodies, but also between the second and third. But in practice, only the first gap is more often fixed, which does not worsen the performance of the model.

 

Shooting Star" and "Inverted Hammer" models in candlestick analysis

 

Another "star" reversal pattern, the "shooting star", consists of just one candle. It indicates the end of the rise in prices. Its appearance causes obvious associations with the name. Whereas the Evening Star is considered to be a very important and reliable pattern, the shooting star is not. The size of the shooting star is not large, it is near the lower price range and its upper shadow is rather large. This model also has no color requirements. The classic shooting star, which is more often encountered in theory, has a price gap with the previous candle. But it is obvious from the figure below that the gap is not very significant.



From the candlestick shown, we can see that the opening trading session occurred near the minimum for the day, then there was a sharp jump and decline in price, as a result, the closing price was approximately equal to the opening value. Forex candlestick analysis showed that the increase in value during the trading session is unproven.